Macroeconomics: Key Concepts, GDP, Business Cycles, and Circular Flow

What is macroeconomics?

The study of the economy as a whole, including total output, total employment, total income, and the overall price level.

What are the main economic goals of macroeconomics?

Economic growth (3%), unemployment around 5%, inflation of 1-2%, and reducing income inequality.

What does GDP stand for?

Gross Domestic Product.

What is GDP?

The market value of all final goods and services produced within a country in a given year.

What key idea links production and income?

Production equals income.

What model explains how production becomes income?

The Circular Flow Model.

Name the three uses of GDP data.

Measuring standard of living (GDP per capita), economic growth, and business cycles.

What is GDP per capita used to measure?

Average standard of living.

What are the four stages of the business cycle?

Peak, slowdown, trough, expansion.

Who officially declares a recession?

The National Bureau of Economic Research (NBER).

What is the GDP formula?

GDP = C + I + G + NX.

What does C represent in GDP?

Consumer expenditures on goods and services.

What does I represent in GDP?

Investment in new capital goods, including structures and inventories.

What does G represent in GDP?

Government purchases of goods and services.

What does NX represent in GDP?

Net exports.

How are net exports calculated?

Exports minus imports (X − M).

What does "investment" mean in macroeconomics?

Spending on new capital goods.

Give examples of investment.

New factories, new equipment, residential housing construction, inventories.

Why are inventories included in GDP?

They are produced in the current year, even if not yet sold.

Why is investment important for the economy?

It creates jobs and increases future production.

What government spending counts in GDP?

Government purchases of goods and services.

What government spending does NOT count in GDP?

Transfer payments such as Social Security and unemployment benefits.

What are transfer payments?

Government payments that do not involve production of goods or services.

What is nominal GDP?

GDP measured using current prices.

What is real GDP?

GDP adjusted for price changes (inflation).

Why do economists use real GDP?

To measure true economic growth.

What is income (Y)?

Wages, interest, rent, and profit.

What is disposable income (YD)?

Income after taxes (YD = Y − TA).

What role do households play in the circular flow?

They provide labor and receive income, which they use for consumption, saving, or taxes.

What role do firms play in the circular flow?

They produce goods and services and pay wages, rent, interest, and profit.

What role does the government play in the circular flow?

It collects taxes and spends on goods, services, and transfer payments.

What role does the rest of the world play in the circular flow?

It engages in exports, imports, and asset purchases.

c

consumption (services, durable goods, non-durable goods)

I

Investment(in capital)

G

Government spending

NX

net exports (exports-imports)

Standard of living %

economic growth 3%

Unemployment %

5% or natural rate

inflation %

1%-2%

GDP per capita

GDP divided by population

Consumers(money in)

-Income

-Borrowing

-Transfer payments

Consumers (money out)

- Taxes

- Savings

-Consumption

Producers (money in)

-Borrowing

-Revenue

Producers (money out)

-investment

-costs

Government (money in)

- taxes

-borrowing

Government (money out)

-Transfer payments (SS, investments)

-government spending

Rest of the world (money in)

-exports (x)

-Foreign purchase of US assets

Rest of the world (money out)

-imports (m)

-US purchases of Foreign assets